About bad debts

Bad debts is the part of accounts receivable that you believe, you won't be able to receive. It is essentially a contra a/c to accounts receivable. for eg. you made a sale of Rs.1,00,000 on credit. You record this amount in the a/c receivable. Now according to your estimates either by past experience or some other approximation, you decide that out of these sales, an amount of Rs. 25,000 can't be recovered. It is just a contingent event. If the amount recovered is greater than Rs. 75,000 you can always reverse the bad debt account. Bad debts are recorded to be on a safer side & due to the rule of account that says that we should record all losses in advance.

The amount due from debtors/ to whom you have lend, which becomes impossible to be received back are Bad Debts and they are oftenn written off in Profit & Loss account and allowed as an expense in Income Tax Computation (provided it has been actually written off)